You have probably heard of the CGT Small Business Concessions (SBC), but do you know what you have to do to be able to access them? The legislation behind the SBC is very strict and requires detailed planning well before the business sale to ensure that you can save the significant tax that the provisions allow. This combined with the fact that the ATO are currently looking very carefully at all CGT SBC claims when your tax return is lodged, means that you need to make sure you are diligent in ensuring you have satisfied all the conditions to access the concessions. Without proper planning you are very likely to make a mistake and not be able to access them.
Following are the conditions that you need to satisfy:
- The business must be small. The taxpayer, and connected entities, needs to turn over less than $2M or the combined assets of the taxpayer and certain related entities needs to be less than $6M.
- The asset being sold must have been an active asset. That is, it is a business or was used in a business. A commercial property used by an affiliated business can satisfy this condition if structured the right way. Shares in a company or units in a trust can satisfy this condition as long as 80% of the underlying assets in the company or trust have been active assets for at least half of their life. This area, in particular, is very complex and it is easy to get tripped up here. For example, excess cash in the business and loans to the shareholders are not seen as active so, if they account for more than 20% of the assets in the entity, then you may fail this test.
- For a company or Trust, there must be a Significant Individual (SI) – this means that someone must own 20% or more of the entity holding the business for the SBC to be accessible.
If you satisfy these tests then you have the ability to utilise the SBC and they are as follows;
- 50% Active Asset (AA) Exemption – allows you to claim a 50% discount of the capital gain so you only pay tax on half the capital gain. Please note, if you have already claimed the 50% General Discount for just holding the asset for more than 12 months (this concession is separate to the SBC and is available to all Australian resident entities except companies) then this AA discount is available on top of this, thus bringing the capital gain down to 25% of the total (it is halved and then halved again!).
- Small Business Retirement Exemption – allows CGT Concessional Stakeholders (the Significant Individual and possibly their spouse) to exempt up to $500k of capital gain each. If you are under 55 when the gain is made, the $500k must go into superannuation. If you are 55 or over you can decide whether to put the amount into superannuation.
- Small Business 15 Year Exemption – this is available where the CGT asset has been held for a continuous period of 15 years in the same entity. Additionally, when the gain is made, the relevant individual is 55 years of age and the disposal of the asset is connected with the individual’s retirement or their permanent incapacity. If the asset sold is a share in a company or a unit in a trust there must have been a Significant Individual in each year of the ownership period.
- Small Business Rollover Concession – this allows the taxpayer to roll over a capital gain made into a replacement active asset and is acquired in the same name as the person who made the capital gain. This acquisition must be made within 2 years of the original capital gain otherwise the gain then crystallises into a new capital gain at the expiration of the 2 years.
These concessions are very generous and can allow you to bring large capital gains down to nil. They are not mutually exclusive. This means you can access more than one of these concessions if you satisfy the conditions. They are, however, very complex and do require proper planning. With this planning (at least 18 months before a planned business sale) you can be successful in saving millions of dollars in CGT.
Don’t leave it too late. Look at your business and structure now to determine whether you need to make some adjustments before you sell your business. The potential saving is in the millions of dollars!